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Acuiti: Sell-side needs investment and automation in derivatives reconciliation – Securities Finance Times

The most significant causes of inefficiencies in derivatives post-trade reconciliation are lack of data standardisation, outdated software, and fragmented data sources, according to a new report by market intelligence firm Acuiti.

Commissioned by software provider Kynetix, the report ‘Derivatives Reconciliations: Good enough is no longer good enough’ surveyed more than 60 sell-side firms operating within the derivatives market.

The report is created in the context of reconciliation processes becoming a growing focus for senior executives looking to reduce risk and enhance their client service.

The identified obstacles to the efficiency of derivatives reconciliation arise from the implementation of multiple data symbology standards — for example, 81 per cent of surveyed tier 1 banks say they use spreadsheets within the core reconciliation process, compared with 19 per cent of brokers and non-bank futures commission merchants (FCMs).

In addition, 19 per cent of tier 2 and 3 banks have more than 10 manual touchpoints in their standard reconciliations process.

Acuiti finds that investment in reconciliation software is increasing as a result of more stringent regulatory oversight, as well as a response to the vulnerabilities highlighted by the significant volatility experienced in 2020.

Matt Dolton, CEO of Kynetix, explains: “After a sustained period of increasing regulatory burden, sell-side firms are recognising the need to address outdated and overly manual legacy derivatives reconciliation processes.”

Such investment can offer sell-side firms efficiencies and cost savings, with 67 per cent of brokers and non-bank FCMs noting they have upgraded their reconciliation software over the past three years.

Of those that upgraded in this timeframe, the overwhelming majority (90 per cent) spent less than 10 per cent of their total back-office budget on technology costs — but this was only the case for half of firms that did not upgrade their software.

Furthermore, Acuiti finds that 60 per cent of firms that had invested in updated reconciliation software met their internal targets for reconciliations to be completed more than 90 per cent of the time, compared with just over one-third that had not invested.

Will Mitting, founder and managing director of Acuiti, adds: “Over the past decade, volumes, the complexity of market structure and regulatory requirements that require efficient reconciliations have all increased substantially, putting immense pressure on operations across the sell-side.”

“While some smaller firms have been able to pull everything together into a ‘golden source’ with zero manual intervention, for larger firms the expanse and complexity of their operations means that reducing manual touchpoints and a reliance on spreadsheets can result in significant strides towards greater efficiency,” he continues.